Japan suffered decade long recession that in real
terms has snatched purchasing power of the people and that in return has
reduced the domestic consumers' demand and increased the unemployment.
Japan is basically an export-oriented country and exports are comprised
of major portion of the economy. Recent rise in exports helped Japan's
economy to grow 0.5 per cent in the April-June quarter.

The rise in gross domestic product, the broadest
measure of production of goods and services, had expected and translated
into an annualized gain of 1.9 per cent. At the same time January- March
figure was revised to just 0.0 per cent, or an annualized contraction of
0.1 per cent, from the 5.7 per cent growth estimated by the government
in June and making Japan's recession last year longer than previously
thought. Further analysis showed that the 0.0 per cent GDP figure in
January-March was rounded up from a negative number, meaning the economy
actual in May when it rose from 5.2 per cent in April.

Japan's unemployed rose 220,000 from the previous
year to 3.52 million, up for the 16th straight month. The number of
employed, including self-employed, fell 780,000 to 63.74 million. Jobs
condition in Japan are worsening as one figure from the Japan's Ministry
of Health, Labour painted reality that for every 100 job seekers at
government-run job agencies, there were 54 jobs available in July.

Capital investment in Japan is shrinking, reflecting
the fact that both the local and international investors are loosing
confidence in Japan. The GDP report showed that capital investment fell
0.5 per cent in April-June from the previous quarter. That leaves
exports as Japan's primary economic fuel.

Now come towards Japan's exports that inclined 5.8
per cent in the April -June quarter, up from 4.8 per cent in January to
March. As a result, external demand contributed 0.3 per cent to GDP in
the quarter, better than the 0.2 per cent from demand at home. But
currently Japan is caught in very difficult situation as its exports are
loosing steam because of appreciation in the Japanese yen that gained
more than 13 per cent to one and half year highs of 115.50 yen from
133.80 yen against dollar since April 01. Japan's exports are dampening
because goods' prices are not competitive in the international markets.

Japanese exporters narrowly watch developments in the
United States as most of their exports are towards where consumer
confidence is persistently falling and affecting retail sales in the
United States. American consumers became much less confident about the
economy in August. The Conference Board, a business-backed research
group, said its index of consumer attitudes fell to 93.5 in August its
lowest level since November 2001 from 94.7 in July against the
expectations of 97.0. Consumer spending represents two-thirds of the
U.S. economy. Steep falls in the US stocks are also weighing on the US
nation's wealth that reduced in recent US stocks and corporate crisis.

Meanwhile both the Bank of Japan and Finance Ministry
continued their efforts to make yen weak versus dollar, as they knew it
very well that only a soft currency can boost Japan's economy. Overnight
Bank of Japan intervened seven times this year in the international
Forex market and sold yen and bought dollar. Japanese officials also
contributed struggle to make yen weak, as Japanese Vice Finance Minister
for International Affairs Haruhiko Kuroda said the ministry was closely
monitoring the foreign exchange market and would take appropriate action
as needed. Japanese Finance Minister Masajuro Shiokawa said that the
dollar was recovering against the yen as he had hoped. He said Japan
would act against excessive volatility in the currency market. In this
regard Senior Japanese Finance Ministry official Zembei Mizoguchi said
rapid moves in forex market were undesirable.

Meanwhile, Japan's economic outlook was briefly
supported after Bank of Japan's "tankan" corporate sentiment
survey came in much better than expected. Diffusion index for large
manufacturers improved to minus 18 from minus 38 in the previous survey
in March, beating forecasts for an outcome of around minus 26. Indices
for non-manufacturers and small firms also improved more than expected.

The Bank of Japan's survey also forecasted that major
manufacturers expected an improvement in sentiment in September for the
fifth straight quarter. And non-manufacturers expected an improvement in
September for the second straight quarter. For smaller manufacturers,
the diffusion index showed an improvement for the first time since
December 2000, and the figure, at minus 41, was the best since June
2001. An improvement of 10 points was the largest since 1994. Smaller
manufacturers also expected sentiment to improve to minus 35 in
September, which was the first forecast for improvement since September
2000. Smaller non-manufacturers' forecast for sentiment in September
showed a worsening of one point to minus 38, which would be the seventh
straight quarter of worsening, though the smallest since September 2000.
It was the first time that the four main categories, big and small
manufacturers and non-manufacturers to rise simultaneously since
September 2000.

On the political front Japan's Prime Minister
Junichiro Koizumi is facing problems to induce structural reforms
demanded by financial institutions such as International Monetary Fund (IMF)
and World Bank. But he might receive minimum support from the Bank of
Japan because discount rates already are standing close to zero at 0.10
per cent and had no more room to cut it further to kick back the fragile
economy. On the other hand it seems that the Bank of Japan will have to
do something exceptional to keep the weak recovery alive.

Recession-weary Japanese got details of a government
plan intended to break a three-year spiral of falling prices. Aimed at
breathing life into the Japanese economy, Prime Minister Junichiro
Koizumi's anti-deflation package, tackles a hit list of economic woes,
from bad debt and sinking stocks to dried-up credit lines for small
businesses.

SPEED UP DISPOSAL OF BAD BANK LOANS:
The government estimates Japan's commercial banks are saddled with some
43 trillion yen (USD 323 billion) in bad debt, while private estimates
run as high as double that amount. Writing off those losses may give
banks a fresh start to finance the economy's expansion.

PRESSURE DEBTOR COMPANIES RESTRUCTURING:
The worst offenders will be
asked to adopt solid turnaround programmes or face the possibility of
folding.

URGE CENTRAL BANK TO LOOSEN MONETARY POLICY:
Bank of Japan Gov. Masaru
Hayami has already indicated that he will comply, possibly by cutting
interest rates further or buying more government bonds to inject even
more cash into the system. Typically, the more money in circulation, the
faster prices tend to rise.

BUOY JAPAN'S SINKING STOCK MARKET:
The plan calls for tightening restrictions on short selling, an
investment strategy that bets on stocks declining. Government officials
have said they want to keep the Tokyo exchange's Nikkei index from
falling much below its current level around 10,000. A government-backed
stock-buying entity called the Banks' Shareholding Acquisition Corp.
will be charged with buying up to 2 trillion yen (USD 15 billion) shares
from banks, which are selling to meet new stockholding restrictions.

FREE UP CREDIT FOR SMALL- AND MEDIUM-SIZED
BUSINESSES: Small-time entrepreneurs
are finding it increasingly difficult to get cash to start up new
businesses. The new plan calls for creating a special fund to make that
easier.

Japan's concerns mounted when rating agency Standards
& Poor (S&P) mentioned that the Japanese reform agenda would
reduce fiscal flexibility and lead to an increase in Japan's already
massive public sector debt. Additionally, S&P said it was keeping
its negative outlook on Japan, putting it at risk of a further downgrade
at some point, due to the delays in structural reform. The credit rating
agency received furious response of the government when it downgraded
Japan in April. After three downgrades in two years, S&P now rates
Japan's long-term local and foreign currency debt at AA-minus. In wake
Japanese Government Bonds (JGBs) dipped only slightly, as Japan is quite
safe on this side as Japanese investors hold around 95 per cent of all
JGBs. The country has no foreign debt to speak of and boasts the largest
pool of private savings in the world, much of it directly or indirectly
under the control of government institutions.

Another rating agency Moody's said it had seen no
evidence that Japan was effectively tackling the underlying economic
problems that put it at risk of a further cut in its credit rating.
Moody's, which rates Japan's domestic debt Aa3, said in mid-February it
might take the drastic step of cutting Japan's domestic rating by two
notches.

After in depth study of Japan's economy, efforts made
by the Bank of Japan, and Officials it seems that only boosted local
demand and United States' economic recovery can boost Japan's fragile
economy. But at the same time Japan needs to overhaul its financial
system and explore markets other than the United States.